General Inertia Corporation Made a Pro Rata Distribution of $50,000

question 30

Multiple Choice

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara,Inc.in partial liquidation of the company on December 31,year 1.Tiara,Inc.owns 500 shares (50%) of General Inertia.The distribution was in exchange for 250 shares of Tiara's stock in the company.After the partial liquidation,Tiara continued to own 50% of the remaining stock in General Inertia.At the time of the distribution,the shares had a fair market value of $200 per share.Tiara's income tax basis in the shares was $100 per share.General Inertia had total E&P of $800,000 at the time of the distribution.What amount of dividend or capital gain does Tiara recognize as a result of the transaction?

• A)Tiara does not recognize any dividend income or capital gain.
• B)Tiara recognizes capital gain of $50,000.
• C)Tiara recognizes dividend income of $50,000.
• D)Tiara recognizes capital gain of $25,000.

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Definitions:

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and what they actually receive, due to market prices.

Tax

A mandatory monetary payment or different kind of tax levied on taxpayers by government entities to support government expenses and various public services.

Consumer Surplus

The difference between the total amount consumers are willing and able to pay for a good or service and the total amount they actually do pay.

Producer Surplus

The discrepancy between the price at which producers are inclined to sell a product and the actual price they get, frequently viewed as an indicator of the well-being of producers.